As most of the real estate market seems to have its eyes set on homeowners through affordable housing, one firm is crafting its niche the opposite direction by targeting investors in need of passive income who desire to be landlords.
Brownstone Capital is currently developing its latest project Amaziah DMW, a 348-unit development with a commercial centre in Muthiga along Waiyaki Way, which is already 85 per cent sold.
The firm’s Investment Manager Hellen Kamwamba talks to Real Estate on why prospective landlords are a good market, challenges with off-plan development and the cost of construction as the Kenya Shilling depreciates against the US dollar.
How would you describe the construction environment in the wake of the depreciating shilling, increased cost of living and the regulatory regime?
There have been significant changes in the cost of construction in particular the prices of steel, cement and labour in various aspects. Even comparing to last year, since we usually have projects every year, we see a big increment in cost, like 20 per cent, but majorly in cost of steel and cement.
On the labour side, due to the increased cost of living, construction workers are also demanding more.
Have these industry challenges affected uptake of units?
For Amaziah DMW, we are 85 per cent sold and we expect to be fully sold by January 2024. But this project has had a very slow uptake compared to others which were sold out in two months. This is especially between June and September. We anticipated the changes in the Finance Act might have an effect as people realigned their finances to ease cash flow.
Investors commit with a deposit of Sh200,000 and the rest is paid in instalments spread across two and half years. Given this, we saw some bit of a slag.
You also understand that the general perception of the industry is not good given that people have lost money, especially new investors. Hence we tend to see new investors today take their time before committing by doing due diligence.
Does selling your project as off-plan dictate the uptake? What is the challenge with this type of offtake when working with investors?
Offplan projects have their own challenges and one is getting investors to have the discipline to remit monthly. If the money is not remitted timely, then you have to restructure your finances to ensure the project is still done on time.
In such a project the buyer and you as the developer are partners. If people(buyers) see you are a bit slow, they may withhold payment. There is a very delicate balance to have people pay on time and make sure the development is making the required milestones.
We also have many people who want to invest but it is difficult to get funding for those who want loans. For ordinary assets you can get a mortgage, but for off plan, banks are very shy to issue funding unless it is an unsecured facility. We then have to wait until the project is done and, buyers can get sectional titles to charge as security.
You are publicising your project as an investment to prospective landlords with a lucrative return of sh35,000 as monthly rental income, and not to individuals who desire to own homes, as many of other developers do. Is there demand in this market segment?
Stay informed. Subscribe to our newsletter
Yes. Home owners in this generation are different. The generation before us invested in land as an asset but today’s generation goes further by asking: is that asset generating an income? You will therefore find first time investors who want such an asset. That is how we have been able to navigate this market. People want an investment that generates passive income.
How then do you ensure demand for those prospective landlords? Do you do any research?
Location is very key for us. For Amaziah DMW, we realised most developers in Muthiga area have specialised in two or three bedrooms. So we opted for more studio and one bedrooms and less two bedrooms. The two bedrooms which go for sh5.5 million and can fetch sh35,000 rent monthly were only 32 and are sold out given the prime location.
When we do research we focus on what is most ideal development in the area and run numbers on how much can we rent the unit, what will be the uptake and, once we are sure of the project, we move towards selling. Even if the market is flooded, from the numbers, we are confident that the return on investment.